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INTERNAL RECONSTRUCTION
Reconstruction is a process by which affairs of a company are reorganized by revaluation of
assets, reassessment of liabilities and by writing off the losses already suffered by reducing the
paid up value of shares and/or varying the rights attached to different classes of shares.
The object of reconstruction is usually to reorganize capital or to compound with creditors or
to effect economies. Such a process is called internal reconstruction which is carried out
without liquidating the company and forming a new one.
Accounting procedure
(i) In case of internal reconstruction by reducing capital, a “capital reduction account” is to be
opened, which is credited with the amount sacrificed by the shareholders, debenture holders
and creditors.
(ii) Then the amount of capital reduction is utilised for writing off fictitious assets, past losses
and excess value of other assets.
(iii) If there is any balance of capital reduction account left after writing off the above losses,
then it is to be transferred to capital reserve account.
(iv) The amount to be written off cannot exceed the amount credited to the capital reduction
amount. But if any reserve appears on the liabilities side of the balance sheet, the same may
be utilised in writing off the accumulated losses and assets.
(v) Write off all fictitious assets (including Goodwill and Patents) and eliminate all
overvaluation of assets by crediting the accounts concerned and debiting the Capital
Reduction (or Reconstruction) Account. For this purpose, any reserve appearing in the books
of the company may be used. If any balance is left in the Capital Reduction (or
Reconstruction) Account it should be transferred to the Capital Reserve Account.
(vi) If there is any contingent liability (like arrears of preference dividend etc.) and if the same
is forgone for the claimant, then no entry will be passed.
(vii) If any contingent liability or unrecorded liability (like reconstruction expenses) is to be
paid, then it will be paid out of capital reduction a/c.
(viii) In case there are any profits or gain occurs during the process of internal reconstruction
then such profits or gains must be credited to capital reduction account.
(ix) In case of surrender of shares, shareholders surrender part of their holdings to the
company, which are utilised to repay debenture holders, preference shareholders and other
creditors of the company. Balance of unused shares surrendered is to be cancelled by
transferring to capital reduction account.
Accounting Entries
1. Entry for share capital reduced without changing the face value of the shares
Share Capital A/c Dr.
To Capital Reduction/Reconstruction/ Reorganization Account A/c
(with the amount of the reduction made)
2. Entry if face value of the shares is also changed on reduction of capital a new
category of share capital is created
Share Capital A/c (Old) Dr.
To Share capital A/c (New) (with the amount treated as paid up)
To Capital reduction A/c (with the difference amount)
3. Entry When debenture holder and creditors are also ready to reduce their claim
against company
Debenture A/c Dr.
Creditors A/c Dr.
To Capital reduction A/c
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CA ANAND V KAKU
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4. Entry in case of appreciation in the value of any asset
Assets A/c Dr.
To Capital reduction A/c
5. Entry if any contingent liability matures and is to be paid immediately the following
entry is passed
Capital reduction A/c Dr.
To Liability payable A/c
Liability Payable A/c Dr.
To cash/ Bank/ share capital A/c
6. Entry for utilising the amount of capital reduction to write off accumulated losses.
Capital Reduction A/c Dr.
To Profit & Loss A/c
To Preliminary Expenses A/c
To Discount on Shares /Debentures A/c
To Goodwill A/c
To Trade Assets A/c
To Patents/Copy rights
To Assets A/c
7. For transferring any balance left in the capital reduction account to capital reserve
account
Capital reduction A/c Dr.
To capital reserve A/c (with the balance left)
8. Variation of Shareholders Rights
(Old)% Cum. Pref. Share Capital A/c Dr.
To (New)% Cum. Pref. Share Capital A/c
“The price of success is hard work, dedication to the job at hand, and
the determination that whether we win or lose, we have applied the
best of ourselves to the task at hand.”
- Vince Lombardi
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